Business performance measurements have evolved from simply tracking outcomes to also measuring activities, inputs, and supply chains. Recent decades have seen great improvements using methods like Six Sigma and TQM, though now most gains require cost cutting. Three effective measurements for ensuring steady improvement are: 1) Measuring improvement initiatives' effectiveness in achieving their objectives, rather than just headcount reductions or financial targets, 2) Distinguishing between performance and improvement measurements, with improvement focusing on rates of change rather than levels, and 3) Establishing measurements linked to a clear strategy of sustained profitable growth through benchmarking, scorecards, improvement initiatives, innovation, and process management.

1. B
usiness performance measurements have existed ever since
the first grain merchant scratched some notes to himself on
a clay tablet. Traditionally, performance measurements have
implied only levels and trends, and have focused on outcomes.
During the last two decades, measurements have moved from
outcomes to activities and, more recently, have included inputs
and supply chains. Since the 1980s, businesses have improved
by using methodolo-
gies such as total quality
management, ISO 9001
and Six Sigma, and the
results have been aston-
ishing. During the 1960s,
overall business per-
formance yielded about
50 to 60 percent, com-
pared to 80 to 90 percent
in recent years. Such gains
come with a price. These
days, most improvements
in business performance
must involve cost-cutting,
which means some tough
decisions for CEOs.
How does one measure,
communicate and per-
petuate improvement?
Does improvement alone
make a business successful? Experience shows that cost-driven
improvement can shrink business, while capability-oriented
improvement can lead to growth. Among the current issues sur-
rounding business performance measurement are layoffs, sever-
ance compensation, outsourcing and reducing employment in
developed economies. To implement the best measurements for
their organizations, CEOs must examine the relevance, purpose,
adequacy, effectiveness and outcomes of all possible decisions.
When a growing company appoints a new president or chief
operating officer, it often hires reliable professionals to help
manage growth and plan for expansion. The direction in which
the company is headed seems clear, and forecasts are generally
positive. During this phase, the company flourishes and everyone
is happy. With a struggling business, however, a new president
usually cuts jobs first, then figures out what to do to stay in busi-
ness. Prospects don’t improve right away. Times are tough for
employees, who worry about losing their jobs as they compete
with their co-workers and friends to stay on the payroll. Both
types of organizations focus on the bottom line, either to improve
profits or simply to survive. When measurements that can guide
decision making toward sustained growth and profitability are
lacking, the cycles of growth and cutbacks will continue irrespec-
tive of leadership.
During a growth phase, a company shouldn’t simply monitor
growth, and during a decline it shouldn’t simply cut costs and
jobs. In either case, top management must plan for sustained
profitable growth. To achieve this, a growing company must
focus on profit, while a declining business must focus on growth.
by Praveen Gupta
Know & Go
• Improvement initiatives must be growth-
oriented, instead of cost-reduction-driven, to
create a positive environment and positive
behaviors.
• Performance and improvement measurements
differ, thus specific improvement measure-
ments must be established to achieve sustained
improvement.
• To achieve growth, businesses must clearly ar-
ticulate the fundamental strategy of sustained,
profitable growth realized through bench-
marking, business scorecards, improvement,
innovation and process management.
• Innovation begins with an idea, and the extent
of innovation varies with the freedom to think.
Most innovative ideas for improvement come
when people are having fun at work and can
think without limitations.
• Good measures must address the purpose, ex-
pected outcome and adequacy of improvement.
44 Quality Digest/March 2007
Measuring Performance
Improvement
Beware of new brooms that sweep
away meaningful data—and people.

2. Thus, any company must look seriously
into implementing measurements for
ensuring steady improvement during both
good and bad times. During good times,
improvement measurements can ensure
profitability, and during a decline they can
provide resources for turning the business
around.
Improvement initiatives
Recently, organizations have imple-
mented focused improvement methodolo-
gies such as lean and Six Sigma. However,
measurements for the effectivness of these
implementations haven’t been directly
related to the methodologies’ purposes.
For example, when an organization imple-
ments Six Sigma, it rarely measures its
corporate sigma level. Or, when it imple-
ments a lean initiative, its effectiveness in
terms of specific objectives hasn’t been
determined. In other words, the ideal state
of either Six Sigma or lean hasn’t been
defined, targeted or measured to ensure
its optimum realization. The table in figure
1 above summarizes Six Sigma and lean
initiatives for most organizations.
One can see that the objectives and
ultimate measurements used by top
management are unrelated items. The
measure of head-count reduction com-
municates to employees that somehow
they’re part of the “waste” to be reduced.
Similarly, in the case of Six Sigma,
performance improvement implies finan-
cial improvement that can be adversely
affected by many factors unrelated to the
methodology. If the bottom line is nega-
tively affected due to adverse market-
ing conditions or a poor business growth
strategy, for example, Six Sigma is
blamed for the poor performance. So the
question is, “What should we measure to
determine the effective implementation
of Six Sigma or lean?”
Performance vs. improvement
After 15 years of creating scorecards
that balance financial and other meas­ures,
organizations still have too many measure-
ments that are of little use. As a result,
a new industry of business intelligence
has appeared. Conferences abound that
focus on business process management,
performance measurements and informa-
tion sharing. Obviously, the need exists
for establishing the right measurements.
Toward this end, let’s take a look at
the difference between performance and
improvement-related matters as outlined
in the table in figure 2 below.
We can see that performance-driven
measurements are more passive than
improvement-driven ones. Simply gathering
information without transforming it into
intelligence is a waste of critical resources.
Organizations need to have a better
understanding of their strengths, a better-
defined improvement initiative, direct
measurements to drive improvement, effec-
tive methods of communicating improve-
ment and an effective plan for continuous
improvement. To determine the improve-
ment opportunities that may exist in an
organization, consider the following:
• Loss of market share
• Ineffective outsourcing
• Lack of business intelligence
• Organizational problems
• Operational inefficiencies
• Product or service problems
• Customer complaints
• Growing competition
• Outdated employee skills
Measurements must be geared toward
realizing business objectives. Many times,
business objectives aren’t clearly spelled
out, and the focus instead is on meeting
month-to-month or quarterly goals. There-
fore, it’s critical to communicate the fun-
damental business strategy, which in most
cases must be concerned with achieving
sustained profitable growth.
Understanding measures for
performance improvement
To establish cost-effective and mean-
ingful measurements, an organization’s
leaders must first establish a value stream
Quality Digest/March 2007 45
Six Sigma
To improve performance
Reduce cost of poor quality
Organization
Implementation using exten-
sive training, DMAIC and
statistics on a large number
of projects
Effectiveness (reduces error
rate)
Meetings, memos
Management-friendly
Difficult to implement, mis-
understood
Process improvement, defect
reduction
Bottom-line improvement
Figure 1: Analysis of Lean and Six Sigma Initiatives
Attribute
Purpose
Relevance to business
Application
Typical success
Outcomes
Communication
Perception
Challenges
Interim measurements
Ultimate measurement
Lean
To reduce waste
Cut cost
Operations
Local implementation through
blitz, kanban, visual manufac-
turing, 5S
Efficiency (reduces space utili-
zation and cycle time)
Bulletin boards, blitz
Employee-adverse
Difficult to sustain, disliked
Space reduction, cycle-time
reduction, set-up time reduction
Head-count reduction
Improvement
Opportunity identification
Improve performance
Focus is on rate of improve-
ment or trend
Utilized frequently
Excellent
Predictably better
Visible
Need it
Improved performance and
financials as planned
Maintaining the momentum
through right measurement
Less accurate measurements
Figure 2: Performance Vs. Improvement
Measurement
Purpose
Relevance
Focus
Application
Effectiveness
Outcomes
Communication
Perception
Result
Challenges
Performance
Information
Sustaining performance
Focus is on level of perfor-
mance
Reported but not used
Questionable
Unpredictable
Hidden
Nobody cares
Improved financials by chance
Performance derailed by unex-
pected elements
Stagnant measurements

3. 46 Quality Digest/March 2007
to the fundamental business strategy of
achieving sustained profitable growth.
The five elements required to achieve the
fundamental business strategy include
benchmarking, business scorecards,
Six Sigma or lean, innovation and good
process management. Benchmarking is
required to understand an organization’s
competitive position in the industry and
establish goals for improvement based on
opportunity and market position. Busi-
ness scorecards are necessary to iden-
tify drivers and establish meas­ures for
ensuring progress. The scorecard should
consist of financial, nonfinancial, objective
and subjective measurements throughout
the organization. Six Sigma or lean initia-
tives are implemented to reduce waste,
and innovation produces new products
or services for realizing growth. Finally,
good process management is necessary to
sustain improved performance.
Improvement measurements must indi-
cate improvement in various aspects of
business. One of the dilemmas with this
is “measurement madness,” or too many
measurements. Thus, measurements for
improvement must identify key areas and
key opportunities, and link them back to
the overriding goal of achieving sustained
profitable growth.
These main measurements take into
consideration leadership, management,
employees, key areas and processes. Some
of the measurements also relate to Six
Sigma and lean improvement initiatives.
For example, to measure process quality
identify key processes and calculate their
individual quality levels in defects per
million opportunities (DPMO) to deter-
mine overall DPMO and the sigma level.
Similarly, for key parts, one looks into the
critical parts and ensures their quality to
the highest level.
Note that areas such as employee rec-
ognition, idea management and rate of
improvement aren’t often measured. How-
ever, these factors do play a significant role
in an organization’s success, and more
companies are using such unconventional
measurements. Organizations are realizing
that along with improvement, innovation
will help them grow and improve their
bottom lines. On the other hand, innova-
tion is still a little-understood process
and, consequently, one that’s difficult to
measure. However, idea management, a
process that feeds into innovative products
or services, isn’t an unknown process, and
it can be measured and improved.
Ideas for improvement
and innovation
Due to the increased demand for innova-
tion, companies need many more ideas than
their research and development departments
can supply for new products and services.
Thus, it’s critical to involve all employees
and solicit their ideas for new products and
services. Fortunately, new software tools
with built-in filters and improved analytical
capability have been developed to manage
the volume of new ideas.
To generate innovative ideas, it’s neces-
sary to look beyond simply good ideas.
I’ve developed a four-step process to help
organizations do this. Typically, companies
hold brainstorming meetings that tend to be

4. Quality Digest/March 2007 47
dominated by a few individuals and suppress others in the room.
The four-step process ensures that everyone has an opportunity
to contribute. To do this, the team leader takes four sets of 3 × 5
in. cards of different colors—green, yellow, red and purple. First,
hand each participant a green card and give them three minutes to
write down their “good” ideas. After
the allotted time, turn the cards over.
Next, give them the yellow card, on
which they will take three minutes
to write down their “crazy” ideas.
Repeat the process for the red card
(“stupid” ideas) and the purple card
(“funny” ideas). The thinking time
per idea will be equal to three minutes
divided by the number of ideas.
As seen in figure 3, this exercise
demonstrates that the thinking time
per idea (along with the extent of
innovation) increases from “good” to
“funny” ideas. Experience shows that
so-called “good” ideas are captured
without much thinking. Real innova-
tion begins with the “crazy” ideas and
maxes out with the “funny” ideas,
which are the hardest to uncover.
Generating new and innovative
ideas is fundamental to driving
improvement. Having established
a business model consisting of key
processes, and mastered the technique to generate innovative
ideas, top management can focus on driving improvement in every
department. Focusing on improvement will create a more exciting
environment, and lead to employee engagement and a forward-
moving, growing organization. This can create new opportunities
for employees by the use of additional resources availed through
improvement initiatives such as lean or Six Sigma.
Establishing measures for performance
improvement
Once improvement becomes part of an organization’s culture,
measurements can be established to monitor and sustain it. Usu-
ally the tendency is to establish financial measures for keeping top
management informed and preventing the initiative from being
dropped. However, direct measures of improvement will improve
an initiative’s success rate as well as the organization’s bottom
line. After talking to many Six Sigma professionals, I’ve noticed a
Figure 3: Generating Innovation
Average
thinking
time (min.)
per idea
Good Crazy Stupid Funny
Extent of innovation
Focusing on
improvement
will create a
more exciting
environment,
and lead to
employee
engagement
and a forward-
moving, growing
organization.
More ideas Less ideas

5. 48 Quality Digest/March 2007
reluctance to measure the corporate sigma
level and a tendency to focus on financials
instead. However, financials depend on
many uncontrollable internal or external
factors. If market conditions change, man-
agement strategy must also change, and
financials could be affected regardless of
the Six Sigma initiative. Thus, to monitor
total progress, a corporation implementing
Six Sigma must measure its sigma level at
the process as well as corporate level unless
the implementation is local or project-spe-
cific. Similarly, for lean initiatives local
measurements such as kanban, inventory
levels and cycle time are necessary.
Measuring overall improvement can be
done by monitoring the rate of improve-
ment. Each department should be asked
to improve quality, timeliness and cost at a
certain rate. If the improvement isn’t real-
ized as expected, appropriate action can be
taken to sustain the improvement rate. To
establish the right measurements, organi-
zations must answer three questions:
1. What’s the purpose of the improvement
initiative?
2. What’s the expected outcome of the
improvement initiative?
3. What’s the measure of its adequacy and
outcome?
Once the measurements are identified,
the organization can decide how it will
establish direct and indirect measure-
ments. When measuring improvement,
the organization mustn’t forget its funda-
mental business objective—which is to
achieve sustained profitable growth.
Too often, a new management team will
walk into a company, lay off 10 percent
of the work force right away, shuffle the
remaining people around, bring in their
buddies and within a year leave the com-
pany worse than when it arrived. Compa-
nies that use cost-cutting alone to create
profit will not last long. Leadership must
drive change to grow the business profit-
ably, and create opportunities for current
and potential employees. Establishing the
right measures of key processes for driving
improvement is critical to achieving sus-
tained profitable growth. Any corporate
improvement initiative and related mea-
sures must demonstrate improvement to the
overall culture as well as the bottom line.
About the author
Praveen Gupta has worked in the busi-
ness performance improvement field since
the 1980s. He founded Accelper Consulting
in 1989 to provide training and consulting
services to businesses. Accelper Consulting
focuses on improving business performance
through quality methods and new tools such
as the 4P model for sustaining process
excellence. Gupta, an ASQ Fellow and a Six
Sigma Master Black Belt, is the author of
Six Sigma Business Scorecard (McGraw-
Hill, 2006), The Six Sigma Performance
Handbook (McGraw-Hill, 2004), Business
Innovation in the 21st Century (Accelper
Consulting, 2007) and Stat-Free Six Sigma
(Accelper Consulting, 2007). He can be
reached at praveen@accelper.com. QD
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